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Stocks Sink on Trade Concerns

USTR Lighthizer's comments about China trade weakened stocks.

Wednesday, February, 27, 2019, 12:31 PM, EST

Market Movers

  • USTR Lighthizer's comments about China trade weakened stocks
  • Mortgage Applications rose 5.3% last week vs. 3.6% in the prior week
  • December Trade Deficit was a record $79.5B vs. $73.6B est. and $70.5B in November..
  • Home sales Rose 4.6% vs. 1.0% est.

Mike’s Commentary

Stocks started about 50 Dow points lower today on continued earnings headlines while traders kept one eye on India/Pakistan for signs of any additional escalation. Asian equities were mixed overnight and Europe is mostly weaker so the day started just like the past two, though that would later change. Equities extended losses by an additional 100 Dow points after U.S. Trade Representative Lighthizer commented to the U.S.

House Ways and Means committee that China would have to make “significant structural changes” and that issues between the two countries “are too serious to be resolved with promises of additional purchases.” Highlighting how difficult a final settlement could be to reach, he stated “This administration is pressing for significant structural changes that would allow for a more level playing field -- especially when it comes to issues of intellectual property rights and technology transfers.”

Stocks have been banking on a settlement as a positive catalyst so the comments extended the Dow’s loss to about 150 points. Of comfort to the bulls is the fact that this week we have seen a few days open slightly lower and work higher as the afternoon progressed. Overall stocks have been quiet this week, creeping above 26,000 last Friday and holding that level through yesterday before today’s action so far. In other congressional testimony, Fed Chairman Jerome Powell testifies for a second day in front of the House Financial Services committee.

Traders do not expect much new news from the testimony – most of the questions from politicians seem to centered around the Fed’s regulatory role and not current interest rate policy. Plus, for those of us who’ve watched a few of these, most House members seem to take 4 ½ minutes of their allotted 5 minutes to ask a question, leaving precious little time for Powell to be heard. Incidentally, the chances of the Fed not taking any action on rates have spiked sharply since December. A month ago, the chance of a rate hike by December 2019 was about 26% with very little chance of a cut (4%) and a two-in-three change of the Fed standing pat. As of today, based on Fed Fund futures, the implied probability of the Fed doing nothing is up to 81%, with the chances of a cut (14%) now greater than the chances of a rate increase (4%). Oh, and the Treasury may run out of cash in late 2019 or early 2020 if the debt ceiling is not raised so we have that conversation to look forward to.

Today, Best Buy (BBY) rose sharply after reporting earnings as did Campbell Soup (CPB). Later we’ll hear from HP, Inc. (HPQ), L Brands (LB), Booking Holdings (formerly Priceline; BKNG) and Monster Beverage Corp. (MNST) with results after the market close. In the broader economy, mortgage applications rose 5.3% vs. 3.6% the prior week as lower rates might be helping housing affordability, which has been a concern. Home sales rose 4.6%, well above the 1.0% estimated and last months 2.3% decline. Pending home sales also fell less than expected. Factory orders, however, rose only 0.1% vs. the 0.6% survey estimate. Durable goods rise 1.2%, in line with last month. There was no estimate for this release. Lastly, the trade deficit was huge again, with December’s delayed data coming in at a record $79.5 billion. Today, only Energy stocks (+1.4%) and Financials (+0.1%) are in the green with all other groups trading lower. However, as suggested by strong monthly and YTD index returns, February has been a “risk on” month. Leading sectors included the trade-leveraged Industrials, Materials and Technology sectors. Through yesterday, no sector is in the red in February and the monthly gains pushed eight of eleven sectors to double-digit gains for the year (see chart below, with price returns through 2/25).

Sector Recap

Click the image for larger view

Brian’s Technical Take

One of this year’s top performing industries may be transitioning into a period of consolidation. Technology was amongst last year’s top performing sector’s with a modest decline of 0.3% which far outperformed the broader stock market. Within tech is the software industry which was one of the few groups that finished in the green in 2018. The S&P Software & Services ETF, ticker XSW, gained 7.7% in 2018 and has rebounded more than 33% from its December lows. The XSW equally weights its 154 US members across the spectrum of market caps and is currently +24% YTD.

Its continued relative and absolute performance in a good sign for the group’s longer term outlook, however over the near term it could see increasing overhead supply kick in leading to a transition from trend to consolidation. This week’s closing highs in the XSW stalled exactly at its all-time highs made last September which should be seen as an expected resistance level in the near term.

It approaches this resistance as its daily RSI recently peaked this week at an extreme 79 reading which while bullish, also suggests near term buyer exhaustion could kick in at any time. In general securities work off overbought conditions through price or time. A more constructive scenario for the software industry would be “sideways” consolidation through time. For the broader market we could see a healthy rotation into other sectors and industries as investors “lock and roll” winners into the next best performers.

Click the image for larger view

Nasdaq's Market Intelligence Desk (MID) Team includes:

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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